Infy's high-trapeze act: It's the rupee, stupid. Next is M&A

If there is one thing that explains Infosys Technologies’ spectacular second quarter (Q2) showing better than anything else, it’s the rupee’s high trapeze act.

The rupee’s sharp depreciation of 11 percent against the US dollar between the first and second quarters has given Infosys a bonanza - and this looks like continuing for a while.

The imprint of the falling rupee is visible in all of Infy’s numbers if one compares the dollar and rupee results of the company. Q2 revenues grew by a terrific 8.2 percent sequentially (QoQ) in rupee terms, but the dollar figures show 4.5 percent - almost half.

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In contrast, the year-on-year (YoY) growth figures were practically unchanged: 16.6 percent in rupee terms and 16.7 percent in dollar terms.

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Net rupee profits after tax were up 10.7 percent in the second quarter (QoQ) this year; in dollar terms, the growth was a third down at 7 percent.

The rupee is the main reason why Infosys kayoed market expectations and rubbished the company’s own revenue and earnings guidance given last July by a mile.

In July, when announcing the first quarter results, the management had projected YoY revenue growth e of 10.8-12.4 percent in rupee terms in Q2 and an actual fall in earnings per share (EPS) of 0.9-2.5 percent. What it actually delivered was 16.6 percent revenue growth and EPS growth (against a fall projected earlier) of 9.7 percent. Against an EPS projection of Rs 29.64-30.15 for Q2, Infy gave us Rs 33.36.

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However, even the dollar story spells good news of a different kind - as attested to by the YoY results. The net profit growth in Q2 is higher in dollar terms when seen year-on-year. It was 9.9 percent this year against 9.7 percent in rupee terms.

Little wonder, Infy shares were on fire and were up 6 percent in the first hour of trades. The market is now primed to expect similar bounties from the other tech pack of Tata Consultancy Services and Wipro, with the BSE tech index up 5 percent in the first hour of trading.

For the December quarter (Q3), the management has projected year-on-year rupee revenue growth of 24.2-26.8 percent and EPS growth of 23.6-25.8 percent - which shows a compression of margins by a bit.

For the fiscal year as a whole, the company has projected consolidated revenues of 21.8-24 percent in rupee terms, and EPS growth of 19.7-21.6 percent. If all goes well, Infosys will be a company with revenues of Rs 33,501-34,088 crore. That would make it a $7 billion company if the rupee stays at arund Rs 48. It would be closer to $8 billion if the rupee were to fall below Rs 43.

Thanks to the rupee’s dive, the company’s new CEO and managing director SD Shibulal has been given a rousing start, but he was the first one to warn that the numbers cannot but be subject to change. He said: “The global macroeconomic environment is still uncertain. It is and should be a concern for the IT industry.”

However, Shibulal was quick to reassure shareholders that Infy was up to the challenge. “In this scenario, clients are looking for new opportunities for growth, accelerated innovation and increased returns on investments. Our strategic initiatives and organisation structure will enable us to build long term partnerships with our clients and help them drive their business objectives.”

However, the next two quarters are unlikely to be business as usual not only because of the uncertain global environment, but because Infosys itself has been trying to transform itself into a more aggressive player. Among other things, it is looking for acquisitions, especially in the healthcare space.

The company has been reorganised into verticals rather than geographies - and this strategy is expected to yield better results. The consulting business will also change the company from being a mere value-added bodyshop to something that will compete with the likes of IBM and Accenture.

In a story last month, Business Standard reported that Infosys was close to a deal to buy a healthcare business, and Thomson Reuters could be a prominent potential target in the range of $700-750 million.

In an interview to The Times of India, Shibulal said that the company’s new strategic direction of being verticals and consultancy led would yield results soon. He said: “We are going to see a very different Infosys, and it’s totally different from what others (in India) are doing.”

Soon after he took over as company chairman, KV Kamath, also indicated that an acquisition was on the cards, and it may not be restricted to healthcare. In an interview to The Economic Times he said: “If there is a good opportunity, Infosys continues to look at all verticals. Certainly, the changes that are happening will throw more on your table. There could be very interesting options as we go along.”

If any of the acquisitions materialise over the next quarter or the one after that, all of Infosys’ numbers will have to undergo a change. For any acquisition will deplete the company’s huge cash position of over Rs 18,000 crore and involve costs that have to be amortised.

Infosys and its shareholders are in for interesting times - and the pyrotechnics of the rupee will only spice things up.

Here are the detailed numbers of Infosys in both dollar and rupee terms.